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Ecolab 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-10
  3. Ex-15
  4. Ex-31
  5. Ex-32
  6. Ex-32

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2005

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File No. 1-9328

 

ECOLAB INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-0231510

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

370 Wabasha Street N., St. Paul, Minnesota    55102

(Address of principal executive offices)(Zip Code)

 

 

 

651-293-2233

(Registrant’s telephone number, including area code)

 

(Not Applicable)

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   ý           No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   ý           No   o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o           No   ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2005.

 

256,024,218 shares of common stock, par value $1.00 per share.

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Third Quarter Ended

 

 

 

September 30

 

(amounts in thousands, except per share)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

1,164,773

 

$

1,090,316

 

 

 

 

 

 

 

Cost of sales

 

572,406

 

519,669

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

420,791

 

410,360

 

 

 

 

 

 

 

Special charges

 

 

1,345

 

 

 

 

 

 

 

Operating income

 

171,576

 

158,942

 

 

 

 

 

 

 

Interest expense, net

 

11,529

 

11,566

 

 

 

 

 

 

 

Income before income taxes

 

160,047

 

147,376

 

 

 

 

 

 

 

Provision for income taxes

 

56,305

 

52,429

 

 

 

 

 

 

 

Net income

 

$

103,742

 

$

94,947

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.41

 

$

0.37

 

 

 

 

 

 

 

Diluted net income per common share

 

$

0.40

 

$

0.36

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.0875

 

$

0.0800

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

255,817

 

258,368

 

Diluted

 

259,086

 

262,252

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Nine Months Ended

 

 

 

September 30

 

(amounts in thousands, except per share)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

3,393,317

 

$

3,112,398

 

 

 

 

 

 

 

Cost of sales (including income from special charges of $66 in 2004)

 

1,669,621

 

1,498,372

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,279,372

 

1,198,180

 

 

 

 

 

 

 

Special charges

 

 

4,896

 

 

 

 

 

 

 

Operating income

 

444,324

 

410,950

 

 

 

 

 

 

 

Interest expense, net

 

34,903

 

33,956

 

 

 

 

 

 

 

Income before income taxes

 

409,421

 

376,994

 

 

 

 

 

 

 

Provision for income taxes

 

144,454

 

137,748

 

 

 

 

 

 

 

Net income

 

$

264,967

 

$

239,246

 

 

 

 

 

 

 

Basic net income per common share

 

$

1.04

 

$

0.93

 

 

 

 

 

 

 

Diluted net income per common share

 

$

1.02

 

$

0.92

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2625

 

$

0.2400

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

255,854

 

257,509

 

Diluted

 

259,410

 

261,240

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

September 30

 

December 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

165,308

 

$

71,231

 

 

 

 

 

 

 

Accounts receivable (net of allowance of $41,305 at September 30, 2005 and $44,199 at December 31, 2004)

 

801,981

 

738,266

 

 

 

 

 

 

 

Inventories

 

337,518

 

338,603

 

 

 

 

 

 

 

Deferred income taxes

 

73,844

 

76,038

 

 

 

 

 

 

 

Other current assets

 

68,914

 

54,928

 

 

 

 

 

 

 

Total current assets

 

1,447,565

 

1,279,066

 

 

 

 

 

 

 

Property, plant and equipment, net

 

837,850

 

834,730

 

 

 

 

 

 

 

Goodwill

 

964,888

 

991,811

 

 

 

 

 

 

 

Other intangible assets, net

 

213,635

 

229,095

 

 

 

 

 

 

 

Other assets, net

 

364,644

 

381,472

 

 

 

 

 

 

 

Total assets

 

$

3,828,582

 

$

3,716,174

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

(Continued)

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

 

 

 

September 30

 

December 31

 

(amounts in thousands, except per share)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

169,529

 

$

56,132

 

 

 

 

 

 

 

Accounts payable

 

264,196

 

269,561

 

 

 

 

 

 

 

Compensation and benefits

 

199,108

 

231,856

 

 

 

 

 

 

 

Income taxes

 

49,955

 

22,709

 

 

 

 

 

 

 

Other current liabilities

 

383,264

 

359,289

 

 

 

 

 

 

 

Total current liabilities

 

1,066,052

 

939,547

 

 

 

 

 

 

 

Long-term debt

 

539,019

 

645,445

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

291,343

 

270,930

 

 

 

 

 

 

 

Other liabilities

 

287,838

 

297,733

 

 

 

 

 

 

 

Shareholders’ equity
(common stock, par value $1.00 per share; shares outstanding:
September 30, 2005 – 255,947;
December 31, 2004 – 257,542)

 

1,644,330

 

1,562,519

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

3,828,582

 

$

3,716,174

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

5



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Nine Months Ended

 

 

 

September 30

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

264,967

 

$

239,246

 

 

 

 

 

 

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation

 

168,863

 

159,981

 

Amortization

 

26,048

 

25,218

 

Deferred income taxes

 

3,439

 

(140

)

Disposal loss

 

 

3,980

 

Charge for in-process research and development

 

 

1,600

 

Other, net

 

902

 

(717

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(86,802

)

(89,146

)

Inventories

 

(5,153

)

(9,104

)

Other assets

 

(4,554

)

(628

)

Accounts payable

 

1,076

 

27,331

 

Other liabilities

 

62,084

 

59,156

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

430,870

 

$

416,777

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

(Continued)

 

6



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

 

 

Nine Months Ended

 

 

 

September 30

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(193,484

)

$

(188,579

)

Property disposals

 

7,378

 

12,184

 

Capitalized software expenditures

 

(5,432

)

(3,501

)

Businesses acquired and investments in affiliates, net of cash acquired

 

(28,106

)

(130,517

)

Sale of businesses and assets

 

1,441

 

3,292

 

 

 

 

 

 

 

Cash used for investing activities

 

(218,203

)

(307,121

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances of notes payable

 

38,811

 

14,232

 

Long-term debt borrowings

 

3,200

 

3,641

 

Long-term debt repayments

 

(3,494

)

(2,400

)

Reacquired shares

 

(126,633

)

(104,291

)

Cash dividends on common stock

 

(67,411

)

(61,775

)

Exercise of employee stock options

 

38,217

 

27,982

 

Other, net

 

 

(564

)

 

 

 

 

 

 

Cash used for financing activities

 

(117,310

)

(123,175

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(1,280

)

(10

)

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

94,077

 

(13,529

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

71,231

 

85,626

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

165,308

 

$

72,097

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

7



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Consolidated Financial Information

 

The unaudited consolidated financial information for the third quarter and nine-month periods ended September 30, 2005 and 2004, reflect, in the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2004 were derived from the audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.  The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

With respect to the unaudited financial information of the company for the third quarters and nine months ended September 30, 2005 and 2004 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards, which do not require an audit, for a review of such information. Therefore, their separate report dated October 21, 2005 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.  PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

 

2. Stock-Based Compensation

 

Currently the company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting.  Beginning in the fourth quarter of 2005, the company will adopt SFAS 123(R) Share-Based Payments, the new standard for expensing stock options.  The company expects the adoption will result in an annual charge of approximately $0.10 per share for the full year 2005.  As part of the transition to the new standard, the company expects to restate its earnings in line with pro forma amounts historically disclosed in the company’s financial statements.

 

Had the company used the fair value-based method of accounting to measure compensation expense for its stock incentive and option plans and charged compensation cost against income over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for the third quarter and nine-month periods ended September 30, 2005 and 2004 would have been reduced to the pro forma amounts in the following table:

 

8



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Stock-Based Compensation (continued)

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

(amounts in thousands,

 

September 30

 

September 30

 

except per share)

 

2005

 

2004

 

2005

 

2004

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

103,742

 

$

94,947

 

$

264,967

 

$

239,246

 

 

 

 

 

 

 

 

 

 

 

Add: Stock-based employee compensation expense included in reported net income, net of tax

 

114

 

61

 

226

 

175

 

 

 

 

 

 

 

 

 

 

 

Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax

 

(5,896

)

(4,728

)

(16,566

)

(14,224

)

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

$

97,960

 

$

90,280

 

$

248,627

 

$

225,197

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.41

 

$

0.37

 

$

1.04

 

$

0.93

 

Pro forma

 

0.38

 

0.35

 

0.97

 

0.87

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

 

 

 

 

 

 

 

 

 

As reported

 

0.40

 

0.36

 

1.02

 

0.92

 

Pro forma

 

$

0.38

 

$

0.34

 

$

0.96

 

$

0.86

 

 

Stock options fully vest upon an employee’s retirement if the service criteria have been met.  The company uses the nominal vesting period approach to recognize compensation relating to these stock options.  Under the nominal vesting period approach, compensation cost is recognized over the options’ stated vesting period.  If the employee retires before the end of the stated vesting period and has met the required service criteria, any remaining unrecognized compensation cost is recognized at that date.  If the company had recognized compensation expense at the time the award is no longer contingent on providing subsequent service (the “non-substantive vesting period approach”), pro forma net income would have been increased by $1.0 million and $1.4 million during the quarters ended September 30, 2005 and 2004, respectively, and $1.9 million and $2.5 million  during the nine months ended September 30, 2005 and 2004, respectively.  In Ecolab’s case, employees become “retirement eligible” at age 55 with 5 years of service.

 

3. Selected Balance Sheet Information

 

 

 

September 30

 

December 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

Inventories

 

 

 

 

 

Finished goods

 

$

177,141

 

$

167,787

 

Raw materials and parts

 

170,258

 

176,336

 

Excess of fifo cost over lifo cost

 

(9,881

)

(5,520

)

Total

 

$

337,518

 

$

338,603

 

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Selected Balance Sheet Information (continued)

 

 

 

September 30

 

December 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

 

 

Other intangible assets, net

 

 

 

 

 

Customer relationships

 

$

183,697

 

$

189,572

 

Intellectual property

 

42,084

 

38,130

 

Trademarks

 

63,799

 

62,874

 

Other intangibles

 

7,493

 

17,104

 

Total

 

297,073

 

307,680

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

(53,377

)

(43,798

)

Intellectual property

 

(9,329

)

(7,726

)

Trademarks

 

(15,527

)

(12,764

)

Other intangibles

 

(5,205

)

(14,297

)

 

 

 

 

 

 

Other intangible assets, net

 

$

213,635

 

$

229,095

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock

 

$

317,966

 

$

315,743

 

Additional paid-in capital

 

551,164

 

501,809

 

Retained earnings

 

1,783,722

 

1,585,957

 

Deferred compensation, net

 

(510

)

(414

)

Accumulated other comprehensive income

 

31,176

 

72,160

 

Treasury stock

 

(1,039,188

)

(912,736

)

Total

 

$

1,644,330

 

$

1,562,519

 

 

Accumulated other comprehensive income as of September 30, 2005 consists of $0.6 million of net unrealized losses on financial instruments and $11.4 million of additional minimum pension liabilities as well as $43.2 million of cumulative translation income.  Accumulated other comprehensive income as of December 31, 2004 consists of $4.0 million of net unrealized losses on financial instruments and $10.9 million of additional minimum pension liabilities as well as $87.1 million of cumulative translation income.  The decrease in cumulative translation income since December 31, 2004 is due to the strengthening of the U.S. dollar against foreign currencies, primarily the euro.  The increase in treasury stock is due to the repurchase of approximately $127 million of the company’s stock during the first nine months of 2005.

 

Interest expense was $12.9 million for the third quarter of 2005 and $38.2 million for the nine months ended September 30, 2005.  Interest expense was $12.3 million and $36.1 million for the third quarter and first nine months of 2004, respectively.  Interest income was $1.4 million for the third quarter of 2005 and $3.3 million for the nine months ended September 30, 2005.  Interest income was $0.7 million and $2.1 million for the third quarter and first nine months of 2004, respectively.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Financial Instruments

 

In February 2002, the company issued euro 300 million of 5.375 percent euronotes, due February 2007. The company has designated this euronote debt as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries.  Accordingly, the transaction gains and losses on the euronotes which are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account.  Total transaction gains and losses related to the euronotes charged to shareholders’ equity were losses of approximately $1.6 million and gains of approximately $0.4 million for the third quarter of 2005 and 2004, respectively, and gains of approximately $28.4 million and losses of approximately $5.5 million for the first nine months of 2005 and 2004, respectively.

 

5. Comprehensive Income

 

Comprehensive income was as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(amounts in thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

103,742

 

$

94,947

 

$

264,967

 

$

239,246

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

4,441

 

1,506

 

(43,891

)

7,432

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

(241

)

(426

)

2,905

 

154

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

107,942

 

$

96,027

 

$

223,981

 

$

246,832

 

 

6. Special Charges

 

In the first quarter of 2002, management approved plans to undertake restructuring and cost saving actions during 2002, including costs related to the integration of the company’s European operations.  These actions included global workforce reductions, facility closings, and product line discontinuations.  These actions were substantially completed by December 31, 2003.  Remaining amounts accrued at December 31, 2003 and through December 31, 2004 primarily represented contractual periodic payments to be made over time.  At December 31, 2004, the accrued restructuring liabilities were satisfied.

 

“Special Charges” for the third quarter and nine months ended September 30, 2004 includes the reversal of $255,000 and $750,000, respectively, of previously accrued estimated severance and lease termination costs.  Of the $750,000 reversed in the first nine months, $66,000 is included as a component of cost of sales.

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Special Charges (continued)

 

Also included in “Special Charges” for the third quarter and nine months ended September 30, 2004 is $1.6 million of in-process research and development charges related to the Alcide acquisition.  These charges include the portion of the purchase price assigned to research and development projects not yet completed at the date of acquisition and which have no alternative future use.  For the first nine months of 2004 “Special Charges” also includes a loss related to the disposal of a grease management product line of the Institutional division of the U.S. Cleaning & Sanitizing segment of $4.0 million ($2.4 million after tax).

 

Remaining restructuring liabilities of $2,458,000 at September 30, 2004 are classified as a component of other current liabilities.

 

For segment reporting purposes, each of these items have been included in the company’s corporate segment, which is consistent with the company’s internal management reporting.

 

7. Business Acquisitions and Investments

 

In January 2005, the company acquired Associated Chemicals & Services, Inc. (aka Midland Research), a water treatment business.  Midland had annual sales of approximately $16 million and their operations became part of the company’s United States Cleaning & Sanitizing and International operations.

 

In February 2005, the company acquired YSC Chemical Company (YSC) based in Bangkok, Thailand.  YSC provides floor cleaning and finishing products in East Asia.  YSC had annual sales of approximately $3 million and their operations became part of the company’s International operations.

 

In April 2005, the company purchased certain operations of Kilco Chemicals Ltd. Based near Belfast, Northern Ireland, Kilco offers products, systems and services for the food and beverage processing industry.  Kilco had sales of approximately $5 million annually, and these operations became part of the company’s International operations.

 

The total cash paid for acquisitions and investments in affiliates was $0.2 million and $1.6 million during the third quarter of 2005 and 2004, respectively.  Total cash paid for acquisitions and investments in affiliates was $28.1 million and $130.5 million during the first nine months of 2005 and 2004, respectively.  In addition, 1,834,759 shares of common stock were issued with a market value of $57.1 million in the Alcide acquisition plus $23,000 of cash in-lieu of fractional shares during the third quarter ended September 30, 2004.  Cash paid for acquisitions in 2004 included payments of restructuring costs related to the integration of the former Henkel-Ecolab European joint venture that were accrued in 2002.  The aggregate purchase price of acquisitions and investments in affiliates has been reduced for any cash or cash equivalents acquired with the acquisitions.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Business Acquisitions and Investments (continued)

 

Based upon purchase price allocations the components of the aggregate purchase prices of the acquisitions made during the third quarter and nine months ended September 30, 2005 and 2004, and the allocation of the purchase prices, were as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

(unaudited)

 

September 30

 

September 30

 

(amounts in millions)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

(3

)

$

14

 

$

 

$

11

 

 

 

 

 

 

 

 

 

 

 

Identifiable intangible assets

 

 

(2

)

8

 

44

 

 

 

 

 

 

 

 

 

 

 

In-process research & development

 

 

2

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

3

 

45

 

20

 

131

 

 

 

 

 

 

 

 

 

 

 

Purchase price

 

$

 

$

59

 

$

28

 

$

188

 

 

In the third quarter of 2004, the company finalized its purchase accounting valuation of identifiable intangibles in the Nigiko acquisition which resulted in a decrease in identifiable intangible assets of $7.9 million and a corresponding increase in goodwill.  In the third quarter of 2004, the company also recorded a charge of $1.6 million for in-process research & development as part of the allocation of purchase price in the Alcide acquisition.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Business Acquisitions and Investments (continued)

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter and nine months ended September 30, 2005 were as follows:

 

 

 

United States

 

 

 

 

 

(unaudited)

 

Cleaning &

 

Other

 

 

 

 

 

 

 

(thousands)

 

Sanitizing

 

Services

 

Total

 

International

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2004

 

$

177,213

 

$

48,929

 

$

226,142

 

$

765,669

 

$

991,811

 

Goodwill acquired during quarter

 

9,548

 

 

9,548

 

1,244

 

10,792

 

Goodwill related to dispositions

 

 

 

 

(376

)

(376

)

Foreign currency translation

 

 

 

 

(433

)

(433

)

Balance as of March 31, 2005

 

$

186,761

 

$

48,929

 

$

235,690

 

$

766,104

 

$

1,001,794

 

Goodwill acquired during quarter

 

1,351

 

 

1,351

 

4,592

 

5,943

 

Foreign currency translation

 

 

 

 

(48,889

)

(48,889

)

Balance as of June 30, 2005

 

$

188,112

 

$

48,929

 

$

237,041

 

$

721,807

 

$

958,848

 

Goodwill acquired during quarter

 

2,339

 

 

2,339

 

285

 

2,624

 

Goodwill related dispositions

 

(130

)

 

(130

)

 

(130

)

Foreign currency translation

 

 

 

 

3,546

 

3,546

 

Balance as of September 30, 2005

 

$

190,321

 

$

48,929

 

$

239,250

 

$

725,638

 

$

964,888

 

 

Goodwill acquired in 2005 also includes adjustments to prior year acquisitions.  Goodwill disposed of in 2005 relates to the sale of a small business in Europe and a small business in the United States.

 

Operations of the acquired companies have been included in the operations of the company since the date of the respective acquisition.  The purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.  These acquisitions individually and in the aggregate are not material to the company’s operations.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8. Net Income Per Common Share

 

The computations of the basic and diluted net income per share amounts were as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

(amounts in thousands,

 

September 30

 

September 30

 

except per share)

 

2005

 

2004

 

2005

 

2004

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

103,742

 

$

94,947

 

$

264,967

 

$

239,246

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

255,817

 

258,368

 

255,854

 

257,509

 

Effect of dilutive stock options and awards

 

3,269

 

3,884

 

3,556

 

3,731

 

Diluted

 

259,086

 

262,252

 

259,410

 

261,240

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.41

 

$

0.37

 

$

1.04

 

$

0.93

 

Diluted

 

$

0.40

 

$

0.36

 

$

1.02

 

$

0.92

 

 

Stock options to purchase approximately 4.4 million and 4.2 million shares for the third quarter and nine months ended September 30, 2005, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.  Stock options to purchase approximately 84,000 shares and 330,000 shares for the quarter and nine months ended September 30, 2004, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9. Pension and Postretirement Plans

 

The components of net periodic pension and postretirement healthcare benefit costs for the third quarter are as follows:

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

International

 

Postretirement

 

(unaudited)

 

U.S. Pension Benefits

 

Pension Benefits

 

Healthcare Benefits

 

(amounts in thousands)

 

2005

 

2004

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

9,737

 

$

7,863

 

$

3,677

 

$

3,258

 

$

772

 

$

795

 

Interest cost on benefit obligation

 

9,467

 

8,548

 

4,764

 

4,405

 

2,215

 

2,152

 

Expected return on plan assets

 

(13,279

)

(12,540

)

(3,147

)

(2,852

)

(443

)

(457

)

Amortization of prior service cost (benefit)

 

385

 

434

 

42

 

29

 

(1,415

)

(1,424

)

Amortization of unrecognized transition (asset)/obligation

 

(176

)

(351

)

79

 

86

 

 

 

Recognition of net actuarial loss

 

2,507

 

1,380

 

411

 

449

 

1,434

 

1,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

8,641

 

$

5,334

 

$

5,826

 

$

5,375

 

$

2,563

 

$

2,183

 

 

The components of net periodic pension and postretirement healthcare benefit costs for the nine months ended September 30 are as follows:

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

International

 

Postretirement

 

(unaudited)

 

U.S. Pension Benefits

 

Pension Benefits

 

Healthcare Benefits

 

(amounts in thousands)

 

2005

 

2004

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

29,211

 

$

23,589

 

$

10,234

 

$

9,876

 

$

2,314

 

$

2,393

 

Interest cost on benefit obligation

 

28,400

 

25,644

 

14,104

 

13,255

 

6,645

 

6,888

 

Expected return on plan assets

 

(39,836

)

(37,620

)

(9,020

)

(8,376

)

(1,328

)

(1,387

)

Amortization of prior service cost (benefit)

 

1,154

 

1,302

 

32

 

89

 

(4,245

)

(4,272

)

Amortization of unrecognized transition (asset)/obligation

 

(527

)

(1,053

)

254

 

252

 

 

 

Recognition of net actuarial loss

 

7,520

 

4,140

 

1,325

 

1,324

 

4,301

 

4,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

25,922

 

$

16,002

 

$

16,929

 

$

16,420

 

$

7,687

 

$

8,213

 

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9. Pension and Postretirement Plans (continued)

 

The company previously disclosed in its financial statements for the year ended December 31, 2004, that it was not required to make any contributions to the U.S. pension plan and postretirement healthcare benefits plans in 2005.  During the third quarter and nine months ended September 30, 2005, no contributions were made to those plans. The company is not required to make any contributions to the U.S. pension plan and postretirement healthcare benefits plans for the remainder of 2005.  The maximum tax deductible contribution for 2005 is $38 million for the U.S. pension plan.

 

Certain international pension benefit plans are required to be funded in accordance with local government requirements.  The company contributed $4.3 million and $12.7 million to its international pension benefit plans during the third quarter and nine months ended September 30, 2005, respectively. The company currently estimates that it will contribute approximately $15 million to the international pension benefit plans during the remainder of 2005.

 

10. Operating Segments

 

Financial information for each of the company’s reportable segments is as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(amounts in thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

(unaudited)

 

(unaudited)

 

Net Sales

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

510,476

 

$

478,464

 

$

1,474,463

 

$

1,359,823

 

Other Services

 

98,315

 

89,157

 

280,453

 

252,807

 

Total

 

608,791

 

567,621

 

1,754,916

 

1,612,630

 

International

 

573,981

 

547,871

 

1,639,134

 

1,566,678

 

Effect of foreign currency translation

 

(17,999

)

(25,176

)

(733

)

(66,910

)

Consolidated

 

$

1,164,773

 

$

1,090,316

 

$

3,393,317

 

$

3,112,398

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

91,206

 

$

86,443

 

$

245,002

 

$

239,030

 

Other Services

 

12,142

 

6,697

 

31,808

 

20,018

 

Total

 

103,348

 

93,140

 

276,810

 

259,048

 

International

 

69,582

 

70,966

 

166,494

 

165,138

 

Corporate (expense) income

 

 

(1,345

)

 

(4,830

)

Effect of foreign currency translation

 

(1,354

)

(3,819

)

1,020

 

(8,406

)

Consolidated

 

$

171,576

 

$

158,942

 

$

444,324

 

$

410,950

 

 

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2005.

 

Consistent with the company’s internal management reporting, corporate operating expense includes income from reductions in restructuring accruals of $0.3 million and $0.8 million for the third quarter and nine months ended September 30, 2004, respectively.  Corporate expense for the third quarter and nine months ended September 30, 2004 also includes a charge of $1.6 million for in-process research and development recorded as part of the allocation of purchase price in the Alcide acquisition.  For the first nine months ended September 30, 2004, corporate expense also includes a charge of $4.0 million related to the disposal of a grease management product line.

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Goodwill and Other Intangible Assets

 

Under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill must be tested annually for impairment.  The company completed its annual 2005 test for goodwill impairment in the second quarter, including businesses reporting losses such as GCS.  No adjustments to the carrying value of goodwill were necessary as a result of this testing.

 

Goodwill and other intangible assets arise principally from business acquisitions.  Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired.  Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives.  The weighted-average useful life of other intangible assets was 14 and 13 years as of September 30, 2005 and 2004, respectively.

 

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period.  Total amortization expense related to other intangible assets during the third quarter ended September 30, 2005 and 2004 was approximately $5.8 million and $5.1 million, respectively.  Total amortization expense related to other intangible assets during the nine months ended September 30, 2005 and 2004 was approximately $17.8 million and $16.3 million, respectively.  As of September 30, 2005, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

 

(unaudited)

 

 

 

(amounts in thousands)

 

 

 

2005 (Remainder: three-month period)

 

$

6,131

 

2006

 

23,698

 

2007

 

23,344

 

2008

 

23,132

 

2009

 

21,722

 

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. New Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payments (“SFAS No. 123R”).  The Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 107 (SAB 107) in March 2005 to assist preparers by simplifying some of the implementation challenges of FAS 123R while enhancing the information investors receive.  The FASB has also issued various Staff Positions clarifying certain provisions of the new accounting standard.  SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights.  SFAS No. 123R will require the company to expense share-based payment awards with compensation cost measured at the fair value of the award.  The company will adopt SFAS No. 123(R) beginning in the fourth quarter of 2005.  The company expects the adoption will result in an annual charge of approximately $0.10 per share for the full year 2005.  As part of the transition to the new standard, the company expects to restate prior period results in line with the pro forma amounts historically shown in the notes to consolidated financial statements.

 

In December 2004, the FASB issued an FSP titled “Application of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109), the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (the “Act”) (FSP 109-1).  Under the guidance in FSP 109-1, the deduction received under the provisions of the Act will be treated as a “special deduction” as described in SFAS No. 109.  As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date.  Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the company’s tax return.  The company began including the benefits from this deduction in tax expense beginning in 2005.

 

In December 2004, the FASB issued an FSP titled “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2).  FSP 109-2 allows the company time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the Act on its plans for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109.  The Act includes a deduction for 85 percent of certain foreign earnings that are repatriated, as defined in the Act, at an effective tax cost of 5.25 percent on any such repatriated foreign earnings.  Companies may elect to apply this provision to qualifying earnings repatriations in 2005.

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. New Accounting Pronouncements (continued)

 

This Act provides the company the opportunity to tax efficiently repatriate foreign earnings for U.S. qualifying investments specified in a domestic reinvestment plan.  The company completed its evaluation for the reinvestment of foreign earnings in October 2005.  See footnote number thirteen.

 

In July 2005, the FASB issued a proposed interpretation titled “Accounting for Uncertain Tax Positions, an interpretation of FASB Statement No. 109.”  This proposed interpretation would clarify the accounting for uncertain tax positions in accordance with FASB Statement No. 109, Accounting for Income Taxes.  The company would be required to recognize, in its financial statements, the best estimate of the impact of a tax position only if that position is probable of being sustained on audit based solely on the technical merits of the position.  The proposed interpretation also would provide guidance on disclosure, accrual of interest and penalties, accounting in interim periods, and transition.  The FASB plans to finalize the guidance during the first quarter of 2006.  Only tax positions that meet the probable recognition threshold at that date may be recognized.  The cumulative effect of initially applying this proposed interpretation would be recognized as a change in accounting principle as of the end of the period in which this proposed interpretation is adopted.

 

13. Subsequent Event

 

In October 2005 the company completed its evaluation for the reinvestment of foreign earnings in the United States pursuant to the provisions of the American Jobs Creation Act of 2004 (the “Act”).  As a result, the company expects to reinvest $225 million of foreign earnings into the U.S.  The Act provides the company the opportunity to tax efficiently repatriate foreign earnings for U.S. qualifying investments specified in its domestic reinvestment plan.  As a result of completing this evaluation, the company expects to record tax expense of $3.3 million, net of available foreign tax credits, in the fourth quarter of 2005.

 

20



 

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Directors

Ecolab Inc.

 

We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. and its subsidiaries as of September 30, 2005, and the related consolidated statements of income for each of the three and nine-month periods ended September 30, 2005 and 2004 and of cash flows for the nine-month periods ended September 30, 2005 and 2004.  These financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to the interim consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with standards of the Public Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, of comprehensive income and changes in shareholders’ equity, and of cash flows for the year then ended, management’s assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2004 and the effectiveness of the company’s internal control over financial reporting as of December 31, 2004; and in our report dated February 24, 2005, we expressed unqualified opinions thereon (our opinion contained an explanatory paragraph stating the company changed the manner in which it accounts for goodwill and other intangible assets as of January 1, 2002).  The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ PricewaterhouseCoopers LLP

 

PRICEWATERHOUSECOOPERS LLP

 

 

Minneapolis, Minnesota

October 21, 2005

 

21



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition.  The discussion should be read in conjunction with the unaudited consolidated financial information and related notes included in this Form 10-Q.

 

The following discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements and Risk Factors” located at the end of Part I of this report.  Additional risk factors may be described from time to time in our filings with the Securities and Exchange Commission.

 

Overview for the Quarter Ended September 30, 2005

 

The third quarter of 2005 was another quarter of steady earnings growth as diluted net income per share rose 11 percent to $0.40 per share.  Contributing to the earnings increase was a 7 percent increase in consolidated net sales to $1.16 billion, improved earnings growth of our U.S. Cleaning & Sanitizing segment, continued operational improvements in our U.S. Other Services segment as well as favorable currency translation and lower income tax rates.

 

Revenue Performance

 

                  Third quarter sales for our United States Cleaning & Sanitizing operations rose 7 percent to $510 million. Institutional sales were up 5 percent, Kay sales were up 12 percent and Food & Beverage, including the acquired Alcide business, had sales growth of 7 percent over the third quarter of 2005.  Healthcare, Vehicle Care and Water Care also showed strong sales growth over last year.

 

                  Sales of our United States Other Services operations increased 10 percent to $98 million.  Both Pest Elimination, with sales growth of 12 percent, and GCS, with sales growth of 8 percent, contributed to the increase.

 

                  Sales of our International operations rose 5 percent to $574 million in the third quarter when measured in fixed currency rates.  Latin America had a double-digit sales increase in the third quarter while Asia Pacific and Canada showed good sales growth.  Sales in Europe grew modestly.  At public currency rates, International sales increased 6 percent.

 

22



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Performance

 

                  Cash provided by operating activities for the first nine months of 2005 of $431 million was used to repurchase 3.9 million shares, make acquisitions and meet our ongoing obligations and commitments.

 

                  Currency translation continued to have a positive impact on our income growth during the third quarter, adding approximately $1.6 million to net income growth.  For the first nine months of 2005, currency translation added $5.9 million to net income growth.

 

                  An improvement in our income tax rate from 36.5 percent in the first nine months of 2004 to 35.3 percent in 2005 added approximately $5.0 million to net income for the nine months ended September 30, 2005.  Excluding one-time benefits, the estimated effective income tax rate for the first nine months of 2005 was 35.7 percent.

 

                  Diluted net income per share was $0.40 for the third quarter of 2005, up 11 percent from $0.36 in the comparable period of 2004.  For the first nine months, diluted net income per share was $1.02 in 2005 compared to $0.92 in 2004. Earnings for the third quarter of 2004 include a favorable tax benefit of $1.9 million related to prior periods and a charge of $1.6 million for in-process research and development related to our acquisition of Alcide Corp.  Earnings for the nine months ended September 30, 2004 also include an after-tax charge of $2.4 million related to the disposal of a grease management product line in the first quarter of 2004.

 

Results of Operations - Third Quarter and Nine Months Ended September 30, 2005

 

Consolidated net sales for the third quarter ended September 30, 2005 were $1.165 billion, an increase of 7 percent over net sales of $1.090 billion in the third quarter of last year.  For the first nine months of 2005, net sales increased by 9 percent to $3.393 billion from $3.112 billion in the comparable period of 2004.  Excluding acquisitions and divestitures, consolidated net sales increased 6 percent in the third quarter and 8 percent for the first nine months of 2005.  Changes in currency translation positively impacted sales growth by approximately 0.8 percentage points for the third quarter and 2.3 percentage points for the nine months ended September 30, 2005.  Sales benefited from new account gains and investments in new products and in the sales and service force.

 

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 50.9 percent and 52.3 percent of net sales for the third quarter ended September 30, 2005 and 2004, respectively. For the nine-month periods, the gross profit margins were 50.8 percent in 2005 and 51.9 percent in 2004.  The third quarter 2005 gross margin compared against a very strong period last year.  The decrease in the third quarter gross margin reflected higher delivered product costs which were nearly offset by selling price increases and cost savings and also included the unfavorable effects of higher incremental costs stemming from hurricanes Katrina and Rita, unfavorable business mix and a one-time inventory correction.  The decrease in gross margins on a year-to-date basis was primarily driven by higher delivered product costs and unfavorable business mix, partially offset by selling price increases and cost savings programs. We will continue to pursue further selling price increases and cost savings to recoup our cost increases and improve our gross margins.

 

23



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - Third Quarter and Nine Months Ended September 30, 2005 (continued)

 

Selling, general and administrative expenses were 36.1 percent of consolidated net sales for the third quarter of 2005, a decrease from 37.6 percent of net sales in the comparable quarter of last year.  For the nine-month period, selling, general and administrative expenses also decreased as a percentage of net sales, to 37.7 percent in 2005 from 38.5 percent in 2004. Selling, general and administrative expenses as a percent of sales improved primarily due to sales leverage, pricing and aggressive cost savings programs.  In addition, the third quarter margin comparison benefited from higher cost levels in the third quarter 2004 which included costs related to the GCS centralization.

 

Net income totaled $104 million, for the third quarter of 2005 and $95 million for the comparable period of 2004.  On a per share basis, diluted net income per common share was $0.40 for the third quarter of 2005 and increased 11 percent over diluted net income per share of $0.36 in the third quarter of 2004.  For the first nine months of 2005, net income was $265 million as compared to net income of $239 million in the comparable period of last year.  Diluted net income per share increased 11 percent to $1.02 for the nine months ended September 30, 2005 from $0.92 for the first nine months of last year.  Net income for the third quarter 2004 includes a favorable tax benefit of $1.9 million related to prior periods and a charge of $1.6 million for in-process research and development related to the Alcide acquisition.  Net income for the first nine months of 2004 also included an after-tax charge of $2.4 million related to the disposal of a grease management product line in the first quarter of 2004.  Currency translation positively impacted net income growth by approximately $1.6 million for the third quarter of 2005 and $5.9 million for the first nine months of 2005.  The comparison of net income also benefited from a lower effective income tax rate in 2005.

 

Sales for each of our reportable segments are as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(amounts in thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

510,476

 

$

478,464

 

$

1,474,463

 

$

1,359,823

 

Other Services

 

98,315

 

89,157

 

280,453

 

252,807

 

Total

 

608,791

 

567,621

 

1,754,916

 

1,612,630

 

International

 

573,981

 

547,871

 

1,639,134

 

1,566,678

 

Effect of foreign currency translation

 

(17,999

)

(25,176

)

(733